Wednesday, October 30, 2013

German inflation drops in October

Inflationary pressure in Germany is further fading away. Based on the results of six states, German headline inflation dropped to 1.2% YoY in October, from 1.4% YoY in September. On the month, German prices dropped by 0.2% MoM. Based on the harmonised European definition, headline inflation decreased to 1.3%, from 1.6% in September, and is now at the lowest level since October 2010.
Looking at the available components at the regional levels shows that headline inflation dropped on the back of negative base effects from oil prices and healthcare costs. Moreover, the end of university tuition in Bavaria and further price discounts on leisure activities and packaged holidays also contributed to benign inflation developments in October.
Looking at consumer prices, inflationary pressure is still hard to find. Consequently, when it comes to German price developments the biggest concern for the ECB is currently probably rather tripled prices of a single construction site in Frankfurt East than headline inflation numbers.
Dropping inflation rates in Germany are both bad and good news. Bad news for the rest of the Eurozone as it complicates the required price rebalancing across the Eurozone, risking a race to the bottom. But also good news for German consumers. With record high employment and nominal wage increases, dropping inflation rates should further support private consumption. At least in Germany, one of Mario Draghi’s new bromides should come true: “with low inflation you buy more stuff”.